Last time, we discussed the possibility that the literal destruction of the low-end hotel supply—along with the rapid rise in hotel room ADRs (average daily rate)—on the Las Vegas Strip could serve to price out many millennials and stunt visitor growth into the future, where:

1. Virtually every new Strip project built or proposed in the current millennium has been 4- or 5-star supply.
2. We imploded the low-end supply (starting with the Dunes in 1993) to make room for the new projects, thus eliminating low-end supply from the Strip entirely.
3. Las Vegas visitor volume has nearly doubled since 1993.

The result has been what would seem to be a rising price floor and a grossly disproportionate upward shift in the composition of the Strip hotel supply. And at a minimum, the overwhelming probability is that the low end of the Las Vegas visitor market is being increasingly underserved, particularly on the Strip itself.

But might there perhaps already be clues that rising room-related costs are already impacting both gaming volumes and visitor volumes?

Are Rising Room Costs Eating Visitor Gambling Budgets?

As I’ve suggested before, the two most likely impacts to casino gambling volume in the U.S are:

1. A fundamentally maturing market for casino gambling. The result of widespread casino expansion across the U.S. since 1989.
2. Declining gambling value. A function of the fact that the casino house advantage has been on the rise across the industry for the past two decades.

But with particular regard to destination markets—most notably the Las Vegas Strip—what has been completely overlooked is the potential impact that rising room-related expenses may be having on gambling volumes.

The table to the right shows both the steady decline in gaming and the increase in room revenue as a percentage of total revenue for both the Strip and Downtown Las Vegas. On the Strip, gaming accounted for 34.2 percent of total spend in 2016, down from 57.8 percent in 1990. Meanwhile, gaming was 49.3 percent of revenue in Downtown Las Vegas in 2016, down from 67.6 percent in 1990.

Las Vegas: Departmental Revenue as Percent of Total

Source: UNLV Center for Gaming Research

Certainly other categories not in the table have been factors: On the Strip, “Food” has crept up from 11.2 percent of total Strip revenue in 1990 to 16 percent in 2016, while the “Other” category encompassing growing convention and other entertainment revenue climbed from 8.1 percent in 1990 to 14.5 percent in 2016. Downtown, the “Beverage” category was up to 9.6 percent of revenue in 2016, from 5.1 percent in 1990 (probably thanks to a combination of the now-constant stream of live music on Fremont and the popular re-development of the surrounding area, putting more non-tourist bodies in the area).

But by far the category with the biggest impact to gaming revenue has been room expense, which on the Strip was up to 28.1 percent of revenue in 2016 from 16.8 percent in 1990, and Downtown was up to 19.2 percent in 2016 from 11.3 percent in 1990. This makes sense in that room expense is a comparably fixed cost—it is effectively a cost of entry, and the one expense hardest for visitors to avoid.

We already know about the rise in ADRs on the Strip (which, incidentally, understate the rise in room-related expenses, as they don’t factor increasing resort fees or room taxes, and—more recently—parking). But if you thought Downtown was safe, Downtown hotel room ADRs were up 36.5 percent from $48 in 2010 to $65.53 in 2016, and through June 2017 were up to $69.32 on the year.

Here’s the point: Rising room expenses don’t seem to produce proportionately wealthier visitors so much as they seem to be eating directly into visitors’ gambling budgets.

Las Vegas Visitor Volumes

It also seems a strong possibility that the rise in room-related expenses is already impacting visitor volumes, as tourist visitation is not quite as robust as the overall visitor numbers might suggest.

From 2000 to 2016, convention attendance climbed 63.8 percent to 6.3 million visitors. But over the same time frame, non-convention visitors—tourists, including a range of visitors likely to be most sensitive to rising room-related expenses—increased only 14.5 percent to 36.6 million, or less than 1 percent per year.

And while convention attendance jumped 13.4 percent in 2015 and 7.1 percent in 2016, we’re already seeing potential signs of sustained weakness among non-convention visitors: Non-convention visitors only increased 1.4 percent in 2015 and 0.6 percent in 2016. And through June 2017, non-convention visitors were down 1.4 percent on the year.

Las Vegas Visitor Volume

Source: Las Vegas Convention & Visitors Authority. *Year-to-date, through June 2017
Conclusion

Again, at a bare minimum, the clear reality to me is that the bottom end of the Las Vegas visitor market is being increasingly underserved. However, virtually all of the discussion over the past few years has been about generational quirks, when the first, second and third questions we need to be asking are:

Do you like rising house advantages?

Do you want more fees, including higher resort fees, higher room taxes, and parking?

Do you want fewer affordable room options?

And so far the standard responses to the first two questions within the industry have been “They won’t care” or “They can’t tell the difference,” while the third question hasn’t even been asked yet.

Now’s probably a good time to come up with better responses.